Question of the week: I see and hear a lot of advertising encouraging me to get an Adjustable Rate Mortgage, I thought those we part of the problem with the housing crisis. Thoughts?
Answer: Great question because we, the mortgage originator, are also getting a lot of solicitations from lenders to use ARMs a mortgage products for our clients. The ARMs being talked about today are not necessarily the ones being pushed four, five, six years ago. Most of the push then was for “Option ARMs” that adjust monthly. Today the push is for what are known as “Hybrid ARMs” that have a period of a fixed rate, three, five, seven or ten years, before adjusting annually.
Looking back, most homeowners with ARMs have been benefiting from the interest rate markets the past few years as short term rates have dropped considerably. Many, most?, borrowers in hybrid ARMs are seeing their interest rates drop when the loan converts from the fixed rate period to the adjustable because the index upon which the loan is based is around 1% or lower. Obviously these low rates will not continue forever so now is a good time to take advantage of the very low rate and accelerate principle reduction so as rates do rise the impact on your payment is less.
Looking forward as to whether obtain an ARM is a good idea or not, the answer is the same today as it was in 2000 or 2003 or 2006: it depends. (Reader: Dennis this is a cop-out answer. Dennis: Read on)
What are your objectives? Are you planning on still being in your home in 4, 6, 8, 11 years? If not, do you have strong certainty you will be selling the home?
Do you have the ability to make large contributions to principle to mitigate the impact of future higher rates/payments when the loan converts to adjustable?
Are you guaranteed a higher income in the future that will mitigate the impact of future higher rates/payments when the loan converts?
If you are refinancing and considering refinancing into an ARM, what will you do with the monthly payment savings? Use it for principle reduction?
The safe, fiscally conservative mortgage that almost all of our clients prefer and fund is a 30 year fixed rate mortgage. However, for those who are very good money managers and have a well thought out plan a 3/1, 5/1 or other hybrid ARM can be a good option.
Have a question for me? Ask me!
If you or someone you know is planning on taking advantage of the Homebuyers Tax Credit then you better get on it. April 30th is fast approaching.
Working backwards this week there was plenty of economic news to push the Mortgage Back Securities market higher (higher prices mean lower rates). By about 5:35 this morning (Pacific) all that pushing fell away in seconds as the unemployment figures for February were released. Non-farm payrolls dropped 36,000 employees, much lower than the 68,000 the markets expected to be lost. Since the markets had priced in 68,000 job losses, “only” losing 36,000 jobs signaled good news which caused a huge sell off in MBS. Prices dumped immediately. Since then (now about 9:30 a.m.) the market has mounted several rallies to get back to even and it may happen by the end of the day.
Why the expectations so high (low)? I don’t know if expecting more job losses sets a high expiation because of a higher number or a low expectation because of what the number means. Either way, the expectation was set at 68,000 mainly due to the unprecedented announcement on Tuesday by White House Economic Advisor Larry Summers that the jobs number would be skewed by the bad weather. He was setting up the markets for a very bad unemployment number, something no one can recall any Administration officials every doing before. The markets reacted accordingly. Now that the number is better than expected, a lot better, they are reacting accordingly.
Fueling the run up in MBS prices early in the weak was weak inflation data. For the month of January inflation was flat and the year-over-year increase was 1.4%. These figures on top of several Fed officials talking about “extended” low interest rates gave a boost to bonds and mortgages.
The biggest news of the past 7 days was a press release late Friday afternoon. If anyone ever sends a press release out after noon Eastern time on Friday then you know they want to sneak it by. In this case it was Fannie Mae announcing a $76 billion loss for 2009. Remember that in 2008 the federal government took over Fannie Mae, so you and I now own it. Also recall that on Christmas Eve, hiding behind the holiday and the announcement of the Senate passing Harry Reid’s version of health care reform, the Treasury announced it was lifting the cap on Fannie and Freddie losses it would back to infinity---no limit on losses—for three years and then limiting losses to $400 billion per year there after.
What’s the strategy? As I have been writing, the Federal Reserve has about $50 billion left in its $1.2 Trillion mortgage purchase program that will end March 31st. Their exit leaves a big hole. But that hole gets filled if Fannie and Freddie can buy back their own securities when they hit market. So they will need some cash for that. Another part of the unlimited loss coverage strategy, as I see it, is to remove obstacles to loan modification and foreclosure avoidance programs. Banks are very resistant to cramming down principal balances, payment forbearance and other programs being pushed by the Administration to help and support those in trouble on their mortgages. A big part of the resistance is because while pressuring banks to assist homeowners by taking on losses through one office of the Administration, another office is scrutinizing banks and has an itchy trigger finger to take them over if their losses are growing and their balance sheets are out of wack. Having Fannie and Freddie spend unlimited amounts of funds from the Treasury allows them to purchase troubled mortgages from the banks.
Please remember one thing. There is no such thing as “government money.” The Treasury is covering the Fannie and Freddie losses with our money. Your taxes are “government money.” The more losses covered by the Treasury the more in debt you and I are.
This week in rates dropped into Thursday and today we have seen the gains of the week pretty much wiped out. Of interest, FHA has had no Friday to Friday change in eight weeks.
Rates for Friday March 5, 2010:
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.75% No Change
30 year conforming-jumbo 5.00% No Change
30 year FHA 4.75% No Change
30 year FHA jumbo 4.875% No Change
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
Some perspective on the earthquakes in Haiti and Chile. The Richter Scale used to measure earthquakes is logarithmic, meaning the difference between 6.1 and 6.2 is greater than the difference between 6.0 and 6.1 in terms of magnitude of effect. Still with me?
The 1994 Northridge earthquake was measured at 6.7 on the Richter Scale. That quake was only about half the force, or seismic-energy yield, of the 7.0 quake in Haiti in January, which was the equivalent of about 2,000 Hiroshima atom bombs exploding at one time. The quake last weekend in Chile was 8.8 on the Richter Scale, or 500 times stronger than Haiti’s, about 1,000 times stronger than the Northridge quake.
Today Chile had an aftershock that was almost the equivalent of the Northridge quake, rattling the area with a 6.6 shock.
Give me the tornados of Oklahoma over the earthquakes, at least you get warnings they are coming!
I am around most of the weekend if you or your clients need any mortgage questions answered or numbers run.
Have a great weekend, let me know how I can be of service to you,
Dennis
Question of the week: I’m self-employed, how is my income calculated for qualifying for a new mortgage?
Answer: I will expand the answer to include not only self-employed but also anyone who owns 25% or more in a company, those receiving commission income and those whose bonus income (yes some people are still getting bonuses) that exceeds 20-25% of their base income.
4506-T is an IRS form that all lenders use to verify that the tax returns you provide for your mortgage application are the same ones you have submitted to the IRS. With the software available in the market to prepare tax returns it is quite simple for someone to quickly make some tax returns that result in necessary income to qualify. On every mortgage with tax returns in the file the lender will verify the forms with the 4506-T, and yes there are still borrowers and loan officers in the market submitting fake tax returns.
Self-employed borrowers, including those with an S Corporation, LLC or Sole Partnership, will need previous two years tax returns. All schedules will be reviewed and added back to the adjusted gross income will be any depreciation deducted as an expense. A two year average will be used to determine monthly income. If you have declining income then the lower income will be used; i.e. in 2008 you filed for income of $75,000 and in 2009 you filed for $69,000; we would use $69,000 for your income.
Rental Income two years of Schedule E income from your tax returns. If the property was placed into service in the most recent year then we can use that year’s taxes.
Commission/Bonus Income If you receive “substantial” income, generally defined as 25% of your total income, but some underwriters now dropping to 20%, from bonuses or commissions we will need the most recent two years’ federal tax returns. Mostly we are interested in any unreimbursed business expenses filed on Schedule A (also known as 2106 expenses). These expenses will be deducted from your gross income and then the income averaged for the two year period.
Unless you are straight salary, W2, employee you should be prepared to provide your most recent two years tax returns with all schedules to determine your qualifying income for a new mortgage. A note at this time of year, taxes are due in a little over two weeks, if you are closing after April 15th be prepared to provide your 2009 returns, or a copy of the extension.
Regarding the 4506-T form and the current time of year. If you file by mail it can take weeks for the IRS to verify that you have filed your returns. To speed up the verification process you can either file electronically, which will still take time to confirm filing but not as long as by mail, or drive your returns to your nearest IRS office and deliver them and request a receipt/verification your forms have been filed.
The big news this week is the Governor signing into law a first time buyers tax credit for Californians. It appears to take effect May 1st, so after the Federal Tax credit expires, though I believe there is some room for the two to overlap for those fortunate enough to have perfect timing. The tax credit is spread over 3 years and is up to $10,000. The information is fairly new having been signed yesterday so I will have more information on it later. The law is basically an extension of a previous tax credit that was solely for purchasers of new homes, the new law extends to those buying existing homes as well. Better hurry as there is only $100,000,000 allocated for existing home purchase tax credits, or enough for 10,000 first time buyers.
Not a good week for the Mortgage Backed Securities (MBS) and bond markets. Losing ground of five of the last six days, bonds are reacting negatively to a continuing over-supply of government debt (another $120 billion plus auctioned this week). Greece’s economic woes and huge debt has weighed heavily on our markets as well as there has been back and forth as to whether and how much the International Monetary Fund (IMF) and/or European Union will support the country. While Greece has a relatively small economy, in the EU every one is connected and the domino effect could start in Athens.
Coming to light, or at least the light is spreading, slowly through the problems Greece is having is the huge public debt in France, Great Britain, Japan and other nations. Following along behind is the United States of America which has been selling Treasury bonds and bills by the hundred billion per week this year. Slowly the extent of public debt is coming more to the front of investors who are wondering how it will all be paid back and when the tipping point will come when the debt load far surpasses the ability to tax for repayment.
Wednesday and Thursday our own debt auctions did not go so well after months of foreign investors gobbling up U.S. Treasury debt they sat back from the table, perhaps saying “Enough. I’m stuffed. I couldn’t eat another bite.” (a bone for your Monty Python fans) The reaction was a huge sell off in MBS.
With little economic data of impact this week foreign and domestic debt led the markets, and for MBS the lead was down, down, down. Today there has been some rebound from ten week lows of yesterday partly because of profit taking from stocks hitting 18 month high, partly as investors move into the safe investments of bonds due to South Korean ship being sunk presumably by the NorKos. But even with a strong rally today we are at 4 week lows on pricing.
Underlying, or lying on top of, the rates is the looming absence of the Federal Reserve from the mortgage markets as their $1.25 Trillion purchasing program is down to a few pennies and ends on Wednesday. Who will fill the void? How will the market absorb so much mortgage debt while the Treasury is financing a current $3.4 Trillion deficit and Congress is working to pass a budget that will add over $10 Trillion to the deficit in the next decade?
Rates are due for a big run up in the coming months. Between the government hogging the market with oversupply, the Feds absence of support and Fed governors saying the “extended period of low rates” needs to no longer be the official rate statement of the Fed, mortgage rates are facing multiple pressures to climb.
My prediction for rates is that our 30 year conforming rate that has been cozy under 5% for most of the past year will climb above 5.5% by the end of summer and by the end of the year be flirting with 6.00% on a consistent basis. We will revisit this later in the year to see how accurate I may or may not be.
Rates snap their flat Friday’s trend with an increase across the board following the continued decline in bond markets all week.
Rates for Friday March 19, 2010:
30 year conventional 4.875% Up 0.125%
30 year conforming-jumbo 5.125% Up 0.125%
30 year FHA 4.875% Up 0.125%
30 year FHA jumbo 5.00% Up 0.125%
Happy 75th to Dana L. Smith, my Dad! As I get older I come to realize more and more how thankful I am for the lessons of integrity, honesty, personal responsibility and accountability you taught us. Being a parent was always first and foremost, I know now how challenging that can be sometimes, but looking at the three adults who are your children I know that there really is no challenging decision: always be the parent! The best lesson you taught me was how to be a good father, I hope it is the one lesson I am able to pass with flying colors. I hope to one day thirty years or so hence to be able to look back and see that your granddaughters were instilled with the same values, ethics and morals that guide me, as they have guided you.
Thanks for all the lessons Dad and Happy Birthday!
Have a great weekend everyone, let me know how I can be of service to you.
Question of the week: We are using a gift from our parents to purchase our home, can we just put their check in the bank?
Answer: I answer this question about once a year. One of the primary obstacles we have faced in the past few years to loan approvals has been verification of funds for closing; specifically not properly documenting gift funds from relatives. While it is common sense to think, “hey they want to give me money why can’t I just take it and put it in the bank? What does the bank care?” They do care and we have seen transactions delayed and relationships strained as we try to get the proper documentation of gift funds.
There are two steps to this equation: first the underwriting requirements when gift funds are involved and second the actual documentation required for gift funds to be accepted by underwriting:
Guidelines: Fannie Mae and Freddie Mac allow gift funds for all transactions. However, unless the gift is equal to 20% or more of the purchase price the buyers must show they are bringing 5% or more to closing. If we have a $400,000 home, and the parents gift $80,000, no issues as we have 20% of the purchase price in a gift. If the parents gift $40,000 for a 10% down payment then we must show the borrowers bringing 5%, or $20,000 to escrow for down/closing. So less than 20% gift then must have 5% from borrower.
FHA has no minimum requirement for the borrower. If parents, or relatives, want to gift all the funds needed for down payment and closing costs that is permissible. Some lenders however have instituted what are known as “layovers” or tighter guidelines when gift funds are involved in a FHA transaction. If you have a transaction with FHA financing and a gift make sure you check to see if there are limitations on income to debt ratios or other underwriting guidelines.
Documentation: The transfer of gift funds must be carefully documented to prove the funds deposited into your account constitute a gift and that you have not borrowed the funds from another source and therefore will have a payment the lender would need to show a payment for in income to debt calculations. The documentation is very simple:
· Name, address, phone number and relationship of donor on application under the assets section
· Proof the donor has the ability to provide the gift, i.e. copy of bank statement with donor’s name on it
· Evidence of the transfer: copy of check from parents, wire confirmation, transfer if you both have the same institution (i.e. credit union account to credit union account)
· Evidence funds have been deposited into your account
Note on cashier’s checks. We used to be able to use a cashier’s check as evidence of ability to give the gift and by pass the copy of the donor’s bank statement. Most lenders will no longer accept the cashier’s check as proof unless the bank provides a letter stating the cashier’s check was purchased with funds from the donor’s account. The purpose is so someone can’t take cash, buy the cashier’s check and type the donor’s name on it as purchaser.
Keep in mind gift funds do not only apply to purchase transactions. In this market environment we have also had gift funds involved in refinance transactions to pay down principle balances, pay closing costs or bring taxes current. These funds need to be documented the same as on a purchase.
If there are any unusual or extraordinary deposits into your account the deposit will need to be documented. If they cannot be documented the funds will not be given credit in your transaction, and you may be declined from an underwriter who suspects a cash advance on a credit card or the funds are borrowed. We have had delays for many different deposits over the years that are perfectly legitimate, but needed to prove it: winnings from Las Vegas deposited into account, brother or sister paying off a loan made several years earlier, inheritance, lottery winnings, under the table bonuses from employer. Several years ago I had a client who made a very large, five figure, deposit into the bank. It was his refunds from the IRS and state from his tax returns. He did not copy the checks before putting them in the bank. Underwriter called for his tax returns on a stated income loan to verify the deposit. His write offs were so great they resulted in the large refunds, and also lowered his qualifying income such that he did not qualify for the loan he applied for. Lesson: if there is a large and unusual deposit into your account plan on having to document it. Photocopy everything before you put the funds in the bank.
As I said at the top, documenting assets is one of the primary obstacles we face in finalizing loan approvals and closing transactions. If you are considering a purchase or refinance transaction in the near future and have some funds to deposit that are not part of your normal salary and compensation call me to ensure you have the funds properly documented.
FHA originations in January were almost $27 billion dollars, with 40% of the applications being refinances. FHA loan volume is at all time highs. Going from about 2-3% of the total mortgage volume a few years ago to 32% of the national mortgage market. Along with the increase in fundings is an increase in foreclosures. For the period October 2009 through January 2010 FHA foreclosures were 42% higher than the same period a year earlier. Unfortunately the increase in foreclosures due to increased volumes has had a very negative impact on FHA mortgages going forward with increased mortgage insurance premiums and possibly/probably down payment requirements.
Not data but words had a big impact this week. On Tuesday the Federal Reserve Open Market Committee met and announced it was not changing the Fed Funds rate. Further, the Fed was sticking by its statement that rates would remain “exceptionally low for an extended period of time.” Not all the Fed governors agree with this statement, but enough of a majority do to leave it intact for now. Finally, the Fed reiterated it is ending its mortgage purchase program as scheduled March 31st after having purchased $1.25 Trillion in Mortgage Backed Securities (MBS).
So far the MBS market has shrugged off the pending end of the Fed in the market. Rates have not been rising in anticipation of the huge void in buyers where the Fed has resided for the past year and more. Perhaps the unlimited losses coverage the Treasury is giving Fannie Mae and Freddie Mac takes that seat at the table? My answer is “Yes.”
In economic data this week inflation is tame with both PPI on the production side of the economy and CPI on the consumer side were pretty much flat in February. With the numbers supporting the Fed statement regarding rates remaining low there was no real news to jolt the market.
Nationally refinances still lead the way. In its weekly application survey the Mortgage Bankers Association announcement showed refinance applications remain over 67% of total mortgage application volume—a level that has been consistent for over a year. With initial unemployment claims at 457,000 last week we can count on the refinance volume to stay well ahead of purchase volume until the initial claims numbers drop significantly.
Looking ahead to next week there are no economic releases that have huge impacts on the MBS market. We will get numbers for existing and new home sales, consumer confidence and 4th quarter GDP. Mortgage backs will take their cue mostly from stocks, which could take their direction from the political battle in Washington over health care. As a prelude, this morning as Democrats appear to be closer to having the majority needed in the House to pass the Senate bill stocks have dropped and mortgages have benefited.
Rates continue their string of flat Friday’s with no change from last week.
A lot of Americans who may not have paid much attention before are getting pretty detailed lessons in civics, politics and government. Each of our votes matters and our elected officials mirror the care, concern and importance all Americans put in their right to vote and elect those officials.
Question of the week: Who are buying homes?
Answer: Many of those who have been in the home buying market the past year are not looking for the quick buck or investment gains on property, but are buying homes for the long term. Able to take advantage of the double dip in interest rates and home prices, they are able to shorten their time frame for being homeowners to help their family. Most of them are very aware that their home may, or probably depending on location, lose value in the near future but they are committed to long term for their families. Waiting may provide them an opportunity to purchase a home for a lower price, but probably at a higher interest rate and possibly with more difficult qualifying as underwriting continues to tighten.
In California a study of 2009 existing home sales released by the California Association of Realtors found that almost half of the homes sold were to first time buyers. Making up 47% of the market, first time buyers were at the highest percentage of the market since 1995. The historical average for the market is 38.6% of the market consists of first time buyers. Clearly first time buyers drove the market in California in 2009, which is very consistent with what our company experienced as well.
Who are the sellers? According to the study nearly half of home sales last year were labeled “distressed”, up from approximately 35% in 2008. A third of all sellers last year sold their property at a loss, not necessarily below what was owed but less than what they purchased the property for originally. This number is the highest in the 20 years CAR has been tracking net cash losses on sales, historically just under 10% of sellers close at a loss.
According to the study the median price, while below 2008 numbers, bottomed out in February 2009 at $245,170. Increasing monthly through the rest of 2009 CAR predicts the annual statewide median price for 2010 to increase $9,000 to $280,000. Keep in mind this is the statewide median, from Eureka to Chula Vista.
What the survey shows is many Californians are more interested in homeownership and purchasing a home for their families than looking to live in an investment. A change in outlook and purchasing mentality from a not insignificant portion of the market during the expansion of the housing bubble.
With no big economic reports this week, until this morning, Mortgage Backed Securities (MBS) mostly off technical factors. Having finished up last Thursday and then dropping heavy Friday, the momentum down continued all week. Two factors contributed to pushing the MBS down further.
$74 Billion in U.S. Debt came to market in three days of auctions by the Treasury Department, further saturating the supply. Coinciding with the auctions was the House of Representatives passing another “stimulus” spending bill over $170 billion, rightfully putting concern into the markets of no end in sight for growing U.S. debt and deficits. More government debt means more supply, means lower bond prices, means higher rates. Investors reacted accordingly.
China announced inflation figures at their highest numbers in nineteen months. With the numbers the number one foreign buyer of U.S. debt announced it was tightening credit policy and raising rates internally. With a better rate of return at home versus abroad (read: United States) plus pressures for future higher rates in the U.S. pressure increases for higher rates.
The MBS chart for the week is a red staircase leading down from left to right as prices dropped heavy last Friday, a brief up and down day Monday that ended up somewhat flat, and then down Tuesday, Wednesday and Thursday. Friday morning opened up with MBS below levels of support and dropping quickly.
Adding incentive to drop further was the release of retail sales for February. After all the horrible weather in February for most of the country—we even had quite a bit of rain here!—the expectations were for retail sales to go negative in February. Surprise! Weather did not keep everyone home. Retail sales increased, albeit only 0.3% but up nonetheless. Immediately following the news stocks rejoiced and MBS frowned, sobbed almost. We find support at the 200 day moving average, perhaps, and MBS prices hit a three to four week low.
Some positive news, sort of. Americans wealth has grown! Much was made in headlines of American wealth increasing over the past year. Reading into the story a major factor is mortgage defaults wiping out negative equity and credit card defaults removing debt personal balance sheets. But as a nation we are using credit less and saving more. How long until we elect officials who behave the same way?
Looking ahead I see little reason to float. There may be some short term blips down in the rates over the next few weeks, but overall the pressure from over-supply, the Feds pulling out of the mortgage markets with their $1.2 Trillion purchasing plan running out in a few weeks and technical signals will keep pressure on rates to increase. To float is to take on a risk proposition that is greater than potential benefit.
Rates for Friday March 12, 2010:
Don’t forget to change your clocks tomorrow before you go to bed or you’ll be late for church on Sunday…or your tee time!
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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